Section 4: Resilience of the financial sytem

1. Section 4: Resilience of the financial sytem

2. Chart 4.1 Major UK banks’ unguaranteed term issuance in public markets(a) • Sources: Bank of England, Dealogic and Bank calculations. • 2010 Q4 is up to and including 26 November 2010. Term issuance refers here to securities with an original contractual maturity or • earliest call date of at least 18 months. This excludes debt issued under HM Treasury’s Credit Guarantee Scheme. It includes subordinated lower Tier 2 and Tier 3 capital instruments with debt features.

3. Chart 4.2 Aggregate SLS repayment profiles(a) • Source: Bank of England. • The chart shows repayment profiles aggregated across all SLS users, a group of banks wider than the major UK banks • peer group.

4. Chart 4.3 Major UK banks’ pre-tax profits Sources: Bank of England and Bank calculations. 2006 to 2010 H1 data are from published accounts. 2010 H2 to 2012 are Bloomberg consensus forecasts.

5. Chart 4.4 Major UK banks’ sources of revenue, impairments and pre-tax profits Sources: Published accounts and Bank calculations.

6. Table 1 Typical instrument characteristics Source: Market contacts.

7. Chart 4.5 Decomposition of new secured lending rate(a)(b) • Sources: Bank of England, Bloomberg, British Bankers’ Association (BBA), Council of Mortgage Lenders, Markit Group Limited and Bank calculations. • 75% LTV Bank Rate tracker mortgage average quoted rate. • For detailed information on methodology see ‘Understanding the price of new lending to households’, Bank of England Quarterly Bulletin, Vol. 50, No. 3, pages 172–82.

8. Chart 4.6 US and European LCFIs’ investment banking revenue decomposed(a) Sources: Bank of England, published accounts and Bank calculations. (a) Excludes BNP Paribas and Société Générale.

9. Chart 4.7 Major UK banks’ total assets(a) Sources: Bank of England, published accounts and Bank calculations. (a) Excludes Northern Rock.

10. Chart 4.8 Major UK banks’ large exposures(a)(b)(c) Source: FSA regulatory returns. (a) Based on exposures that exceed 10% of eligible capital at the end of the reporting period. (b) Excludes Bank of Ireland. (c) Excludes exposures to individuals, governments and central banks.

11. Chart 4.9 Major UK banks’ core capital(a) • Sources: Bank of England, Capital IQ, published accounts and Bank calculations. • (a) Excludes Britannia. • Diamonds show the level of core Tier 1 capital after regulatory adjustments including available-for-sale reserve, cash-flow hedging • reserve, defined benefit pension scheme, adjustments for scope of regulatory consolidation, foreign exchange on reserve capital instruments and upper Tier 2 loan stock, adjustment for own credit; and some other deductions including intangible assets, net excess of expected losses over impairment and securitisation positions.

12. Chart 4.10 Major UK banks’ and LCFIs’ leverage ratios(a)(b) • Sources: Bank of England, published accounts and Bank calculations. • Assets adjusted on a best-efforts basis to achieve comparability between institutions reporting under US GAAP and IFRS. Derivatives netted in line • with US GAAP rules. Off balance sheet vehicles included in line with IFRS rules until 31 December 2009. See footnote (d). • Assets adjusted for cash items, tax assets, goodwill and intangibles. For some firms, changes in exchange rates have impacted foreign currency assets, • but this cannot be adjusted for. Capital includes total shareholders’ equity adjusted for minority interest, preference shares, goodwill and intangibles. • (c) Excludes Northern Rock. • (d) Revision to US GAAP accounting rules on consolidation from 1 January 2010 are applied to end-2009 data giving a clearer measure of leverage.

13. Chart 4.11 Major UK banks’ CDS premia(a) Source: Markit Group Limited. (a) Five-year senior CDS premia.

14. Chart 4.12 SLS and CGS repayment schedules • Sources: Bank of England, Dealogic, Debt Management Office and Bank calculations. • For 2010, this shows actual SLS repayments made by end-November 2010. For 2011 and 2012, data are based on voluntary • repayment plans. For all years, data cover all SLS users, a group of banks wider than the Report’s major UK banks peer group.

15. Chart 4.13 UK historical household saving ratio, deposits and loans(a)(b) • Sources: Bank of England, ONS and Bank calculations. • Chart shows annual net flow of household sector sterling deposits with UK-resident banks, and sterling loans to the household • sector from UK banks. • (b) 2010 H1 data are annualised.

16. Chart 4.14 Reduction in UK banks’ pre-tax profits from a hypothetical funding shock(a)(b) • Sources: Bank of England, Bloomberg, Markit Group Limited and Bank calculations. • The analysis calculates the impact on 2010 H1 pre-tax profits (annualised for 2011 and 2012). It assumes banks cannot reprice their loan books and • that the cost of refinancing sources of funding other than long-term unsecured wholesale funding and repayment of public sector support schemes is unaffected. • (b) Chart shows data for a subset of the major UK banks peer group — Banco Santander, Barclays, HSBC, Lloyds Banking Group, Nationwide and RBS.

17. Chart 4.15 Banking system refinancing requirements(a)(b) • Sources: Bank of England, Dealogic, FDIC, Fitch, SoFFin, UK DMO and Bank calculations. • Calculated as a percentage of average issuance between 2005 and 2007. Only senior unsecured debt, subordinated debt, covered bonds, • RMBS (public) and official sector support (government-guaranteed debt issuance and asset swap facilities) have been included in the calculations. RMBS issued in the United States and EU have been assumed to mature, on average, around four and five years respectively, following origination. Only issuance to end-November 2010 is included in calculations. • (b) Banking systems are defined on an ownership basis.

18. Chart 4.16 Impairment charges, write-offs and changes in GDP(a)(b) • Sources: Bank of England, BBA statistical abstract, ONS, published accounts and Bank calculations. • New impairment charge and write-offs less recoveries as a percentage of total loans and advances to customers for the largest four UK banks. The • impairment ratio excludes some charges made against problem country debt during 1987–92, as described in the June 2002 FSR. Many of these impairments were released as the exposures were sold or asset quality improved. • Data before 2000 are drawn from ‘Bank provisioning: the UK experience’, in the June 2002 FSR. The original sources of these data are banks’ published • accounts and the BBA statistical abstract. These data have been reconciled to banks’ published accounts on a best-endeavours basis. • (c) From 2004 accounting standards changed. Data from 2004 are on an IFRS basis.

19. Chart 4.17 UK banks’ current impairment allowances compared to potential expected losses in three illustrative scenarios(a)(b) • Sources: Bank of England, BBA statistical abstract, FSA regulatory returns, published accounts and Bank calculations. • The chart shows potential losses for the largest four UK banks in three scenarios, based on the residual maturities of loan assets and rates of write-offs net of recoveries. The • normalisation scenario uses a write-off rate of 1.0% which is based on write-off rates falling from the current rate to the 1997–2007 average rate. The current scenario uses the 2010 • H1 annualised write-off rate of 1.4%. The 1990s scenario uses the average write-off rate during 1990–94 of 1.5%. • (b) See footnote (b) in Chart 4.16. • Collectively, the green bars show the total additional impairments needed to cover the indicative loss in each scenario. Each shaded segment shows the value of impairments • required per year, assuming these can be spread smoothly over the 4.5 year residual maturity of banks’ loans. The four initial years in each scenario are therefore equal, while the value of impairments in the final year (the lightest segment) is around half of this.

20. Chart 4.18 Major UK banks’ aggregate balance sheet as at 2010 H1(a) Sources: Bank of England, FSA regulatory returns, published accounts and Bank calculations. (a) Excludes Northern Rock. (b) Includes borrowing from major UK banks. (c) Includes (among other items) loans to UK-resident banks and other financial corporations and holdings of UK government debt. (d) Includes Tier 2 capital, short positions, insurance liabilities and derivative contracts with negative marked-to-market value. (e) Assets are not risk weighted. As a percentage of risk-weighted assets, Tier 1 capital is 11.4%.

21. Chart 4.19 Major UK banks’ and LCFIs’ price to book ratios(a) • Sources: Bloomberg, Thomson Reuters Datastream and Bank calculations. • Chart shows the ratio of share price to book value per share. Simple averages of the ratios in each peer group are used. The chart • plots the three-month rolling average. • (b) Excludes Northern Rock (from end-2007), Nationwide and Britannia.

22. Chart 4.20 Major UK banks’ pre-tax return on equity(a) • Sources: Published accounts and Bank calculations. • (a) Calculated based on end-period profits attributable to shareholders and shareholders’ equity. • Leverage is defined here as total assets divided by shareholders’ equity. This differs from the adjusted leverage measure used • and described in Chart 4.10 and used elsewhere in the Report.

23. Chart 4.21 Life insurance companies’ CDS premia(a) Sources: Bloomberg, Markit Group Limited and Bank calculations. (a) Based on representative sample of large insurers. Each insurer is weighted by total assets as at end-June 2010. (b) Includes Aflac, Hartford, MetLife, Principal Financial Group and Prudential US. (c) Includes Aviva, Legal & General and Prudential. (d) Includes Allianz, AXA, Generali and Munich Re.

24. Chart 4.22 Insurers’ equity prices(a) Sources: Bloomberg, Thomson Reuters Datastream and Bank calculations. (a) Based on representative sample of large insurers. Insurers in each index are not asset weighted. (b) Includes Aflac, Hartford, MetLife, Principal Financial Group and Prudential US. (c) Includes Allianz, AXA, Generali and Munich Re. (d) Includes Aviva, Legal & General and Prudential. 

25. Figure A Overview of key payment systems Source: Bank of England.

26. Chart 4.23 Venue market share for FTSE 100 trades by value Sources: Fidessa Fragulator® and Bank calculations. Fragulator® is a registered trademark of Fidessa group plc. (a) BOAT SI comprises trades undertaken through systematic internalisers reported to Markit BOAT. (b) Between May and December 2008.